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Public domain, private incentives - I

August 04, 2003

Looking back over the decade of reforms, the one outcome virtually everybody would agree on is the extent to which the economic role of the state has shrunk.

Whether it is capital expenditure by the government, or the number of jobs it generates every year, or the quantity and quality of the services it provides, there is no question that the government as a whole is doing far less than it was ten years ago.

When asked on one's assessment of the sectors which show the most promise in the Indian economy today, it wouldn't be at all tongue-in-cheek to say that they are largely ones, which have stepped in to fill the space the government has vacated -- not strategically, but simply because the system has collapsed under its own weight.

These would include security services, drinking water, coaching classes at all levels of education, domestic power equipment -- the list could go on and on.

There are larger questions in relation to this shift in the balance between the private and public sectors.

First, did we throw out the baby of essential services that only the public sector can deliver with the bathwater of inefficiency and corruption?

Second, if a more sustainable balance between the private and public domains is to be found, what is the appropriate organisational form that this would take?

The World Bank recently published a development report for India, entitled 'India: Sustaining Growth, Reducing Poverty'. The issue of public service delivery, placed in the broader context of a deteriorating fiscal condition, takes centre stage in the report.

The basic point that the report makes in this regard is that poverty reduction is critically dependent on the quantity and quality of public services reaching the poor. This may seem like an obvious point, but the fact is that the concept of poverty in India has been virtually monopolised by the food sufficiency criterion.

Looking beyond food to other needs of the poor, not just those having to do with a minimum current standard of living but, more importantly, to the kinds of resources needed to increase their prospects of upward mobility, is a much-needed expansion of the poverty criterion. It should completely change our collective perception of how much poverty there is in the country today.

More importantly, it should form the basis of a consensus around the first question raised above. Shrinking government across the board, without an explicit strategy for exit and downsizing can, and did, impose a heavy cost on the poor.

Having accepted the argument that the balance tilted too much away from the public sector, where does the solution lie? The report puts its eggs in the basket of civil service reform, suggesting a broad sweep of measures.

The principles underlying the recommendations are well-known and unexceptionable. Who can argue with transparency, accountability, freedom from political interference and the incentivisation of efficiency and good practices?

Translating these into concrete steps, however, is another matter altogether. The report provides information on a number of indicators, which could well serve to convince the reader that change is pretty much impossible.

For example, over 90 per cent of government employees are in the Class III and IV categories. The former, with a few exceptions, are basically clerical, whose file management functions have already been made redundant by information technology.

The latter comprise occupations like peons and sweepers, of whom, the report suggests "...most could be let go without any discernible impact upon government functioning."

The report also presents data on the relative earnings in the public and private sectors for various occupational classifications.

For all classifications considered, public sector earnings were 133 per cent higher than those in the private sector in 1999-00, up from 92 per cent more in 1993-94.

For occupations that would fall in Class IV, the public sector premium was between 93 per cent and 145 per cent in 1999-00. For Class III occupations, the premium ranged from 72 per cent to 114 per cent.

But this is not the whole story. Even in the higher-skill occupations, public sector premiums ranged from 27 per cent for engineering technicians to 102 per cent for teachers.

Importantly, while the premiums increased as a result of the implementation of the Fifth Pay Commission recommendations on salaries (its recommendations on a simultaneous downsizing were not implemented), a substantial premium has always apparently existed.

These two patterns must be seen in the broader context of the overall employment scenario in the country. Yes, overall public sector employment has been dropping in absolute terms.

This is partly the result of less hiring, but the trend is reinforced by a retirement bulge amongst the cohorts that were hired in the make-work binges of the late 1960s and early 1970s.

However, in comparison, employment in the private organised sector is equally stagnant. It has been growing at close to nothing over the last few years, and actually declined in absolute terms by the end of 2002, the latest year for which data are available.

Unorganised sector employment, which is over 90 per cent of private sector employment, has been growing at around one per cent per year, not really keeping up with the growth in the working age population.

One might argue that our employment statistics are hopelessly inadequate and do not capture much of the service sector dynamism we are seeing today.

Perhaps. However, even allowing for some downward bias in the employment numbers, the fact is that a government job is a more prized possession for insiders (and a coveted objective for outsiders) than it ever was.

More so, in exactly the kinds of positions that the report believes there is near-total redundancy.

Even if the government completely stopped hiring across a range of occupational categories, it would obviously take years for any kind of desirable equilibrium to be reached.

But that is an impossibility. Governments, particularly in states in which alternative sources of employment have withered, cannot ignore the political compulsions of new jobs.

They may be fewer than before because of fiscal constraints, but the temptation will never entirely disappear. Once the retirement windfall (a mixed blessing because of the pension liability) eases off, if economic conditions remain as they are, aggregate public sector employment will, in all likelihood, begin to show a net increase again.

And, unquestionably, this will predominantly be in the Class III and IV categories.

So, the question is, if we are stuck with a monumental rigidity in the public sector, which is completely immune to radical reform, is there any way out at all? I will explore this question in my next column.

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